Optimize the value of your construction project · Optimize the value of your construction project...

Optimize the value ofyour construction projectfrom strategy to execution

Mexico City, MexicoOctober 15, 2013

www.pwc.com

PwC’s Capital Projects and InfrastructureAdvisory Services

Combining engineering, construction and projectmanagement skills, the PwC CP&I team serves the fullasset life cycle from strategy through execution.

Exploration /Concept

Pre-feasibility FeasibilityPlanning &

Construction,Execution and

Operations,closure, and

PwCOctober 15, 2013

Concept Planning &Design

Execution andStart-up

closure, andreclamation

Defineneed

Specifyscope

OptionAnalysis

Businesscase

MonitorBenefits

ReviewProject

EngineerConstruct

Test &Hand-over

Reviewevaluation

Funding/approval

Optimizing Capital Projects - Mexico City2

CP&I global presence

Australia 30

US & Canada,200

UK, 200HK and China, 9

India, 290

PwC

Australia 30

Brazil 4

Canada 35

CEE 25

China/HK 9

India 290

Japan 17

Mexico 20

Middle East 12

Singapore 12

South Africa 23

Spain 12

UK 200

US 165

Australia,30

South Africa, 23

Central andSouthAmerica, 10

Over 200 CP&I professionals within the Americas20 full-time CP&I staff in Mexico

October 15, 2013Optimizing Capital Projects - Mexico City3

Mexico, 20

Industries and sectors the CP&I practice services

Energy Utilities Transportation

PwCOptimizing Capital Projects - Mexico City October 15, 2013

Petrochemical

Mining Mega-events

Entertainment /Hospitality

Healthcare

Communications

4

Optimize the value of your capital project

A. Why do projects fail?

B. Aligning capital project with corporate strategy

C. Case studies - differentiators in practice

PwCOctober 15, 2013Optimizing Capital Projects - Mexico City

5

Why do projects fail?


6

Why do projects fail?

Technical problemsSuppliers’ failures 8%

Inappropriate/inadequateresources

InadequateProject Environment

InadequatePlanning/Monitoring

Directlyrelatedtotechnical aspects

4%

4%

10%

11%

15%

Technicalaspects

Ineffective Projectgovernance,

management &oversight

Weak /ambiguous

contract terms,misalignedincentives

Unanticipatedsite conditions

Poor projectcontrols(cost &

schedule)

Design errors andomissions leadingto scope growth /

re-work

PwCOctober 15, 2013

92%Monitoring

Lackof clearobjectives

Directlyrelatedtomanagerial aspects

Lackof management(organizational)

20%

36%

Managerialaspects

Optimizing Capital Projects - Mexico City

Costoverruns /schedule

delays

Imposed cashconstraints /

delayed payment

Inexperiencedmanagement

teamSkilled laboravailability

Poor riskidentification,

management andresponse strategy

Late design/ poorproject

definition

Inadequatecommunication/ slow decision

making

Insufficientplanning / poor

estimating

7

Only 2.5% of projects are delivered on-time, on-budget, with expected benefits

Under Budget6%

1-25%Over Budget

19%76-100%Over Budget

101% +Over Budget

12%

Projects with cost overruns

PwCOctober 15, 2013

The causes of failure are common and fairly well understood…yet are frequently repeated

Source: PwC analysis on global mega-projects, and industry research. See PwC’s Correcting the Course of Capital Projects, April 2013

26-50%Over Budget

24%

51-75%Over Budget

15%

Over Budget24%


What causes ‘Surprises”Common challenges with capital projects

Strategic People Process / Systems

• Lack of clearinvestment strategy

• Project by projectfocus

• Investment notaligned with

• Spending withoutauthorization

• Personality based budgeting• Inconsistent project business

case• Multiple project approval

• High variability withforecasts

• Lack of granularity andaccuracy in resourcedemand

• Poor visibility into project


aligned withbusiness priorities

• No linkage betweeninvestment basisand deliveredbenefits

• Multiple project approvalchannels

• Lack of process control,governance

• Lengthy project approvaldelays

• Lack of clear roles &responsibilities

• No linkage to riskmanagement

• Poor visibility into projectprogress and performance

• Ineffective project changecontrol

• No data, reporting, anddocument controlstandards

• Unpredictable cash flow• No benefit realization

reporting

9

How is “Value “ measured?

75% of companies reported an average shareprice drop of 12% within 90 days of reporting a‘troubled project’ (significant negative trend orevent)

n=36

Thirty-seven percent of directors believethere is no clear allocation of specific 37%

75%

PwC

82% of Directors reported havinglimited or no engagement incapital projects

n=400

there is no clear allocation of specificresponsibilities for overseeing major risks

among the board and its committees.

37%

October 15, 2013Optimizing Capital Projects - Mexico City

82%

10

Capital project performance can erode share value- If mismanaged and miscommunicated


11

The true cost of failure

Real or perceived project failure goes beyond the directimpacts associated with increased costs or schedule delays

• Loss of revenue associated with missed production/operation targets

• Inefficient capital allocation and need for short term financing

• Loss of shareholder confidence

PwC

• Loss of shareholder confidence

• Strained relationships with delivery partners / supply chain

• Claims and disputes with vendors / contractors

Optimizing Capital Projects - Mexico City October 15, 201312

Aligning capital projects withcorporate strategy

“This is an opportunity to say, can we makedo with less and do more…”

“We’ve put an extreme focus on issues ofproductivity and capital discipline…”

PwCOctober 15, 2013

“Lower costs and rising production can. andmust, live together in a lower [commodity]price environment…”

“We will spend the minimum amount ofcapital required to maintain the economicpotential of these assets..

PeterMarrone, CEO Yamana Gold Yamana Annual General Meeting, April 30, 2013Andrew MacKenzie, CEO BHP Billiton Australia Financial Review,March 08, 2013

Alec Kodatskym, CIBC World Markets Analyst National Post, May 02, 2013Jamie Sokalsky, CEO Barrick Gold Globe and Mail, February 14, 2013


Key high performance differentiators

1. Strategic alignment

Plan Execute

Assess Develop Procure Deliver Operate DisposeStrategy

Monitor

Capital Project Lifecycle

Increase the likelihood of success - Strategy throughexecution

PwCOctober 15, 2013


2. Organizational capability

3. Governance, controls and technology

4. Procurement and contracting

5. Scope, schedule and cost management

6. Risk and issue management

7. Stakeholder management


1. Strategic alignment – identifying investmentsProject selection and prioritisation based on criteria,constraints and long-term strategy

Financial metricsFinancial metrics

PwC

Strategic alignmentStrategic alignment

RiskRisk

Embedded valueEmbedded value


2. Organization capabilityEveryone is part of ‘Governance’

Execution

Oversight AssuranceProject Sponsor

ExecutiveSteering

Committee

Externalschedule

Advisory Board

PwC

Project Director

ProjectControls

Engineering Procurement

Owner’sEngineer

Consultants

EPC Vendor

Subcontractors

FabricatorsMaterialSuppliers

QualityManagement

Commissioning EHSConstruction


2. Organization capabilityOperational “Readiness”

• Integrate capital project planning and execution with corporate functions

• Scale organization to align with planned and active projects

• Establish transparency and early warning mechanisms

• Create the framework and financial mechanisms for driving capital efficiency

Portfolio Management


Portfolio Management

Financial ManagementAnnual Planning & Budgeting Norms

PortfolioOptimization

Project Planning

HRManagement

Project Management and Controls

P & SCManagement

Project Estimating & Costing Norms

Project AccountingStrategicPlanning

ContractorManagement

17

3. Governance, controls and technologyScalable Governance / Delivery ModelsAvoid a ‘One Size fits all’ approach

Mega ProjectThe mega project is an order of magnitude (or more) largerthan the typical project for the organization.

Margin

OH/RiskCapex

Feed/Opex

$

Time

Capital project delivery risk scenarios

PwC

One-Time Large or Very Large ProjectCapital projects are not executed as a normal course ofbusiness and this is a single capital investment.

Portfolio of Small and Medium ProjectsThe schedule involves a collection of projects for meeting aspecific objective (e.g. growth or regulatory)

Capital Intensive Repeatable ProjectsThe asset base for the company requires steady capitalinvestment to maintain production.

Margin

OH/Risk

Capex

Feed/Opex

$

Time

$

Time

Margin

OH/Risk

Capex

Feed/Opex

$

Time

Margin

OH/Risk

Capex

Feed/Opex



• Design – bid – build (traditional)

• Design – build

• Engineer, Procure and Construct(EPC)

• Engineer, Procure andConstruction Management

• Fixed price / lump sum

• Fixed price / unit price

• Cost reimbursable

• Target Cost / GMP

Delivery Model Pricing Model

PwC

Construction Management(EPCM)

• PPP – Public Private Partnership

• Construction management

◦ CM - agent

◦ CM - at risk

• Hybrids – BOOT, BOT, PEPC,LSTK

October 15, 2013Optimizing Capital Projects - Mexico City

• Negotiated

• Competitive bid

- Single / Multi stage

- Single / Multi package

Procurement Method

19


Project Execution Plan (PEP)The PEP is the detailed execution plan foreach of the projects within the portfolio.

Project Procedure Manual (PPM)The PPM includes detailed processes,procedures, standards and requirements.

Governance documents takes intoaccount all types of capital

projects and contractingstrategies across organization

Align oversight with contracting strategy


Portfolio Oversight Policy (POP)The POP summarizes and communicatescorporate standards that should be appliedto all projects within the capital projectportfolio. The document will includeproject / program management standards,and summary level processes / procedures.

Project Execution Plan

Project Procedure Manual

Portfolio Oversight Policy

20


Pre-conceptPre-concept ConceptConcept FeasibilityFeasibility EngineeringEngineering ConstructionConstruction

• Plan forresources

• Define roles• Define success

criteria• Define models

and scope

• Identifyopportunitiesand scenarios

• Classify risks• Align objectives• Identify quick

wins

• Quantifyeconomics

• Define optionsRank by value,risk and effort

• Submit BusinessCase

• Engineering• Procurement• Operations plan• Risk plan• Contracting• Sanctioning

• Construction• Plan and

logistics• Risk

management• Supervision• Measurement

Post Imp. Review

• Track benefitsrealization

• Operations• Measurement• KPI monitoring• Plan correction

Project Optimisation - Industry Best PracticeFront end loading – ‘influence curve’

PwC

and scope wins Case • Measurement

Maximum Influence

Minimum Influence

Cost to implementchange

Project lifecycle October 15, 2013Optimizing Capital Projects - Mexico City21

5. Scope, schedule and cost managementRealistic pricing and contingency aligned with level ofscope definition

Class 50%-2%

Class 41%-15%

Adapted from the AACECost Estimate

Classification System

+50%

<+100%

100%

Levelo

fS

co

pe

Defin

ition

PwC

ProjectDefinition

3%-5%

SchematicDesign

15%-20%

DesignDevelopment

35%-45%

ConstructionDocuments90%-100%

Class 3

10%-40%

Class 2

40%-70%

Class 1

70%-100%

Base Estimate

+15%

-10%

+20%

-15%

+30%

-20%

-30%

-50%

0%

Levelo

fS

co

pe

Defin

ition


5. Scope, schedule and cost managementIntegrated planning and scheduling

Business Unit - High levelschedule overview

Region - Level 1 schedules withsome level of integration

PwC

some level of integrationbetween projects

Program – Level 2 schedulesintegrated within programs

Project – Detailed level 3-4schedules using standard coding



Schedule progress output


As-Built Bar

As-Planned Bar

As-Built Bar

As-Planned Bar

24


Schedule analytics output

Shows variance between forecasted (original) duration and actual duration.Highlights contractor’s ability to accurately forecast durations.

Outside Battery LimitsCoker

PwC

25% - Lessthan or Equalto OriginalDuration

75% - Greaterthan OriginalDuration

CokerSulfer Recovery UnitGas/Oil Hydrotreater



Schedule analytics output

1500

2000

Ac

tiv

ity

Co

un

t

A bow wave graphic shows the number of activities scheduled to complete eachmonth for every schedule update.

PwC 26

0

500

1000

1500

Ac

tiv

ity

Co

un

t

Schedule Update Dates (Data Dates)October 15, 2013Optimizing Capital Projects - Mexico City

6. Risk and issue managementCan your execution teams answer these questions?

• How confident are you that we will complete this project on budget?

• How have you identified, tracked and quantified risks and issues?

• Is there enough contingency/unallocated provision remaining?

• Which risks are most likely to threaten success?

PwC

• What is mitigation and response strategy to each?

Quantitative risk assessments are attractive because theyindicate a range of potential outcomes in terms oflikelihood (probability)


6. Risk and issue managementRisk management and cost uncertainty

• A risk-based estimate forunforeseeable events impact todefined work scope

• Represents a total estimate ofwhat project is likely to cost.

0.08

0.1

0.12

Co

nfi

den

ce

Level

BaseEstimate

80%ConfidenceLevel (P80)

Contingency

100%

PwC

what project is likely to cost.• Does not include escalation or

changed work scope

• Tracked as separate line –item

• Not a "cushion" or "safety net.“

0

0.02

0.04

0.06

7.3

7.4

7.5

7.7

7.8

7.9

8.1

8.2

8.4

8.5

8.6

8.8

8.9

9.0

9.2

9.3

9.4

9.6

9.7

9.8

10

.0

Co

nfi

den

ce

Level

Estimated Cost $M


6. Risk and issue managementCapital cost efficiency

Top-down “bubble” of contingency

Broad brushedContingency “bubble”to cover all wells on site(e.g. 10% on allprojects)

0

0.005

0.01

0.015

0.02

0.025

0.03

0.035

0.04

0.045

0.05

PwCOctober 15, 2013

0

0.05

0.1

0.15

0.2

0.25

Bottom-up “shrink-wrapped” cost estimate

Contingency for eachwell is “shrink-wrapped” aroundindividual risk profiles

Optimizing Capital Projects - Mexico City

29

Small Project Mega Project

$ 5 – 10M $ 5 – 10B

6. Risk and issue managementUnconventional shale plays


30

6. Risk and issue managementRisk management – drilling & completion s example

Item Optimistic Expected Pessimistic

Drilling

Site preparation 375,000 400,000 575,000

Rig (Mob/De-Mob) 900,000 1,000,000 1,200,000

Drilling & Cementing 1,325,000 1,500,000 1,700,000

PwC

Drilling & Cementing 1,325,000 1,500,000 1,700,000

Casing 1,000,000 1,100,000 1,250,000

Completion

Stimulation 2,800,000 3,000,000 3,300,000

Perforation & Flowback 1,100,000 1,250,000 1,550,000

Tubing & Surface Equip. 200,000 250,000 325,000

Drilling & Completion 7,700,000 8,500,000 9,900,000


P70: $674.76M

P90: $705.62M

60%

70%

80%

90%

100%

2.0%

2.5%

3.0%

Cu

mu

lati

ve

Pr

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t<=

x)

Dis

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ete

Pr

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y(c

on

fid

en

ce

tha

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t=

x)

6. Risk and issues management

Budget/Bid Strategy aligned with risk appetite andmarket conditions

P90

PwC

P10: $593.63M

P30: $632.62M

Base Estimate*:$639.41M

P50: $653.22M

0%

10%

20%

30%

40%

50%

60%

0.0%

0.5%

1.0%

1.5%

$5

56

$5

65

$5

74

$5

82

$5

91

$6

00

$6

09

$6

17$

62

6$

63

5$

64

3$

65

2$

66

1$

67

0$

67

8$

68

7$

69

6$

70

4$

713

$7

22

$7

31

$7

39

$7

48

$7

57

$7

65

$7

74

Cu

mu

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Pr

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Dis

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Pr

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t=

x)

Total Project Cost ($Mn)

P50


6. Risk and issue managementRisk management - managing contingency

• Separate identification and management of contingency improvescost transparency and enables proactive management actions

• Each risk has an owner and mitigation strategy (most valuable aspectof quantitative risk management)

• Many organizations give “ownership” of contingency amounts to a

PwC

• Many organizations give “ownership” of contingency amounts to asteering committee or senior management team

- PMO must demonstrate need for contingency draw;

- Requires leadership involvement in project decisions and growth;

- Active management of a separate contingency cost pool enhancesoverall project budget management



IdentifyStakeholders

AnalyzeStakeholders

SegmentStakeholders

DevelopCommunication

Strategy

PrepareCommunication

Plan

Stakeholder Analysis Communication Strategy and Plan

• Assess stakeholders

Maximizing likelihood of success while reducing exposure torisks associated with each stakeholder.

PwC

• Identifyindividuals orgroups thathave an impactor will beimpacted bythe selection ofan alternativefundingmethod.

• Assess stakeholdersacross the followingdimensions:Level of influenceLevel of impactLevel of

commitmentAnticipated

resistance

• Segmentstakeholdersbased on similarcharacteristicsand currentpositioningacross thedimensions ofstakeholderinfluence /impact.

• Develop acommunicationsstrategy to meetthe changinginformationalneeds ofstakeholdersover time.

• Prepare adetailedcommunicationplan thatincludes keymessages,timing,frequency, anddistributionmethods.


Case studies


35

Case study – Iron ore mining project

$6Billion Iron Ore project – PwC carried out baseline assessment and quarterlyreviews of this investment in one of the world largest base metal reserve. Site visits,delivery partner interrogation focused on scope definition, estimating accuracy,execution readiness, emerging risks, issues and mitigation strategies, and reportingto the Board through web-based dashboards.

Actions Project Impact and Outcomes

• Conducted baseline assessment ofproject risk profile/team capabilities;

Defined current state findings andrecommendations to achieve target state

PwC

project risk profile/team capabilities;• Developed three year review plan

focusing on key project risks andmilestones throughout the projectlifecycle.

• Reviewed overall project structureincluding the Owner’s team as well asthe EPCm and EPC.

• Performed scheduling analytics andverified current project completiontimeline and performance trending.

recommendations to achieve target state• Improvements in governance, oversight• Standardization and documentation

(Project Execution Plan),• Formal communication strategy,• Scheduling and planning process;• Risk and change management process.• Executive summary presented to the

Board of Directors.


Case study - Refinery upgrade & modernization

An Integrated Oil & Gas company needed to establish confidence of its current costand schedule forecasts of one of its major capital projects. Initially sanctioned as a$3.8B, 36 month project, it was projected to be a $7.1B 5-year project. Risk, Costand Schedule validation and analytics were utilized to quantify likelihood of success,and identify actions to improve confidence in delivery.


• Reviewed design and scope definition• Evaluated effectiveness of governance

• Key trends and variances identified inschedule with remediation strategy

PwC

• Evaluated effectiveness of governanceover EPCM firms and Integrated PMO

• Performed schedule analytics• Created Risk Register, and Quantitative

Risk Assessments to test contingency• Analyze performance / cost trends• Established predictive analytics model

linked to CPM schedule and budget• Reviewed procurement and contract

administration and change control• Identified and reported on areas of

concern and/or focus

schedule with remediation strategy• Identified nonconformance issues in risk

reporting and change control• New target completion date and cost

model was established to monitor workto completion

• Established tighter change controls andrisk mitigation strategy

• Established 90% confidence in newtarget completion date and budget

• Established new contingency draw downmechanisms and procedures


Case study – Shale field development planning

An integrated oil company needed to improve drilling and completion costs,establish predictability and improve return on investment on shale fielddevelopment The status quo (cost environment) was not sustainable; and significantcycle time improvement and develop implement integrated planning. (land,logistics, pad, rig, post rig crews) was required to decreased standing time,inefficiencies and to ‘reduce the drag’

Objectives Project Impact and Outcomes

Develop consistent understanding &• 10 – 50% improvement in availability


Develop consistent understanding &application of the NWD workflow andhandover processDefine and clarify standard roles andresponsibilitiesIncorporate ongoing Wells Handover Teamwork into processDefine the standard workflow to establishthe baselineImprove integration and collaborationacross functions

• 10 – 50% improvement in availability• 15 – 25% reduction in costs• 30 – 40% reductions in drilling

cycle time• 15 – 40% improvements in project

schedule performance (vs. originaltarget)

• 10 – 20% lower actual project budgetspending (vs. original target)

38

Case study – New build power generation

$35Bn capital program, including an aggressive program to build new power stations,return to service and major power lines. Two new 4800 MW coal fired power stationsare part of the program, where a ‘no Surprises’ effort has assisted in assessingperformance and trends to date, predicting risks in subsequent phase, enhancing deliverycapabilities, and providing an added layer of assurance and insight.


• Reviewing and assessing selected majorwork packages and current project

• Identify overall exposure to costoverruns and schedule delays

PwC

work packages and current projectmanagement systems and processes:

• Establish whether the identified workpackages are being managed inaccordance with the contract andapplicable policies, mandates, andregulatory prescripts

• Supplemental claim / dispute strategiesto minimize exposure to additional costs

• Schedule and cost support• Risk and issue management support

overruns and schedule delays• Identify potential contractual and

commercial remedies to recover costs• Mitigation plans for overruns, delay or

other significant concerns observed• Improvements to existing contract

management designed to control costgrowth and schedule slippage.


Key takeaways / Q&A

• Direct impact of capital project performance on share value

• Key differentiators to add value, increase confidence and reduce risk


2. Organizational capability


PwC



5. Scope, schedule, and cost management

6. Risk and issue management



Our contact information

Anthony Caletka, PE,CCM, CFCC

[email protected]

Francisco J. IbáñezCortina

(55) 52 [email protected]

PwC

Luis R. Infante +52 55 [email protected]

Brett Bisaga, PE [email protected]


October 15, 2013

gracias

Further reading - CP&I Thought leadership

© 2013 PwC. All rights reserved. "PricewaterhouseCoopers" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, or, as the contextrequires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate legal entity. This presentation is protectedunder the copyright laws of the United States and other countries. This presentation contains information that is proprietary to PricewaterhouseCoopers LLP, andshall not be disclosed outside the recipient's company or duplicated, used in whole or in part, by the recipient for any purpose. Any other use or disclosure, in wholeor in part, of this information without the express written permission of PricewaterhouseCoopers LLP is prohibited.

Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultationwith professional advisors.

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